Global shit-storm: tighten those sphincters!

Wednesday, 18 December 2002 By E NON E MOUSE

On November 12, 2002, CSIS - Center for Strategic and International Studies, in Washington - sponsored a conference on the economic consequences of an attack on Iraq. The conference brought together a group of military and political experts, oil market analysts, macroeconomic modelers, and financial market experts who first developed a set of war scenarios and then collaborated on an analysis of the economic consequences of an attack on Iraq.

The economic analysis was based on three war scenarios, developed by CSIS national security expert Anthony Cordesman, who set out a range of possible military outcomes and political repercussions. Perhaps the most important point of the analysis was the wide range of possible outcomes and the difficulty in assigning probabilities to the various possibilities. As a result, we proceeded by developing a range of scenarios that covered a range of possibilities and used these scenarios as the foundation for the economic analysis.

In the benign case, there is a quick and decisive victory. Iraqi oil is off the market for only a short period, there is no damage to oil producing facilities in Iraq or elsewhere in the region, other OPEC countries increase production to offset the loss of Iraqi oil, there are few adverse political repercussions in the region, and there are no serious terrorist attacks in the U.S. or among our allies. In the intermediate and worse cases, there are progressively greater disruptions to oil supply, progressively more adverse political repercussions in the region, and progressively more serious terrorist incidents.

The effect of the war on oil prices in the benign case is modest and unwinds quickly. Indeed, the lifting of uncertainty about the outcome of the war results in a rally in equity markets and improved economic performance relative to the no-war case. The effects are more serious in the intermediate and worse case scenarios. Output growth slows markedly for a couple of quarters in the intermediate case, and the unemployment rate remains over 6% at the end of 2003. In the worse case scenario, the economy falls back into recession, with the unemployment rate reaching almost 7 ½%.

Some of the key conclusions from the study are:

· In both the no-war and benign war cases, oil prices are projected to be lower than today in one year. In both the intermediate and worse case scenarios, oil prices are higher than today for at least the next two years, and significantly higher in the worse case scenario.

· Economic performance is better in the benign war scenario than in to no-war case, because a quick and decisive victory eliminates uncertainty without producing any adverse effects.

· There are, however, serious adverse effects on economic performance in the intermediate and worse case war scenarios, and the worse case results in a global recession.

Ladies and gentlemen, tighten those sphincters: the shit-storm cometh!

posted by Larry Loudmouth
Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive